ICAEW.com works better with JavaScript enabled.
Economic Insight

UK Business Confidence Monitor: National

An authoritative and authentic check on the nation's economic pulse, Q3 2021.

The latest ICAEW Business Confidence Monitor (BCM) shows that Business Confidence continues to reach record levels, boosted by strong sales expectations. Other issues such as staff turnover and transport, however, are becoming increasingly apparent.

The results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The interviewing is continuous, the latest findings are based on the period between 19 April and 16 July 2021.

Key points

  1. Confidence is again at a record level, boosted by strong sales expectations, especially for domestic markets.
  2. Customer demand is less of an issue but other challenges still exist and are increasing in prominence: skills availability, staff turnover, regulatory restrictions and (especially for Manufacturers and those that export) transport problems.
  3. Companies also expect costs and prices to rise as the economy expands. However, they are not anticipating either input costs or selling prices to rise more rapidly than in the pre-pandemic period.
  4. Businesses also plan to raise investment in capital equipment and Research & Development, reflecting the strength of demand, less widespread problems of spare capacity, and higher expected profits. Retailers and Wholesalers are in the forefront, as they shift increasingly online.
  5. The optimism is shared across sectors, after a year in which some saw a rise in sales but others experienced significant declines. Transport & Storage companies expect a particularly strong improvement in their sales.
  6. Variations across regions and types of businesses are not particularly marked, although companies that do not export are slightly more optimistic than those that do.

GDP

The economic recovery is continuing. Inflation has picked up.

UK: GDP INDEX

  • GDP growth picked up pace in June as the UK’s economic recovery continues.    
  • Meanwhile the latest (June) inflation figure was slightly stronger than recent figures, partly reflecting how low prices were a year ago.
  • The removal of the last domestic lockdown restrictions was delayed from June to July, while international travel remains curtailed.
  • COVID-19 infection rates have risen sharply, but hospitalisation rates have picked up only slightly.

The economic recovery continues, with GDP data from the Office for National Statistics showing a 1.0% expansion between May and June. The hospitality sector made a significant contribution to this, reflecting the reopening of indoor hospitality. However, growth in June was held back by falls in industrial production and construction output. The manufacturing sector also saw very little growth as it faced supply-chain problems, with vehicle production particularly troubled by the global shortage of computer chips.

Some of these factors contributed to a rise in inflation: the official CPI measure jumped from 2.1% in May to 2.4% in June, the highest figure since August 2018. With international travel still very constrained, domestic holiday accommodation and restaurant prices have surged, while shortages of new cars have boosted second-hand prices. Global oil prices have also risen sharply, and a weaker sterling has raised the cost of imports.

However, the biggest factor behind the very high June inflation rate was simply the weakness of prices a year ago. This also helps to explain why average earnings growth also looks strong. Over time the year-on-year comparisons will become less challenging as the very low figures of a year ago drop out of the comparison. That should reduce the risk of inflationary expectations becoming entrenched and hence self-fulfilling.

However, the risk is not zero, and the Monetary Policy Committee may now begin to feel a need to either raise interest rates slightly or modestly withdraw support from the banking system, to slow the economic rebound.

Confidence overall

Confidence is at a record high, reflecting expectations of strong sales growth.

  • The Business Confidence Monitor Confidence Index has reached +47.0 in Q3 2021, another record high.
  • All sectors, regions and sizes of businesses share in the optimism, which is clearly linked to expectations of strong sales growth.
  • Companies anticipate that their domestic sales will rise by 7.4% and exports by 4.4% over the next 12 months.
  • The difference reflects a stronger rebound in home markets, following the UK economy’s particularly steep decline in 2020.

The Business Confidence Monitor Confidence Index for Q3 2021 is at another record high, of +47.0. All sectors are sharing in the optimism, as indeed are companies across all nations and regions, and both large and small businesses.

This is clearly related to expectations of strong growth in sales. Although domestic sales are still slightly lower than a year ago at -0.2%, companies expect them to rise by 7.4% over the coming 12 months: a record outlook for domestic sales.

Export sales, currently running at almost exactly the same level as a year ago, are also projected to see a sharp boost, although somewhat less so than for domestic sales: an increase of 4.4%. Output in the UK fell further in 2020 than in most other advanced economy nations, and that means a slightly stronger rebound simply to achieve pre-pandemic levels.

As with overall confidence, companies across all sectors share in the expectations of sharply increased sales. Some such as IT & Communications and Business Services are already achieving higher sales than a year ago, whereas in others, such as Property and Transport & Storage, that point looks a little way off.

Business challenges

As the economy recovers, businesses face slightly different challenges.

  • There has been a fall in companies for whom customer demand is a rising challenge, alongside an increase in the number of companies increasingly constrained by regulatory requirements.
  • And as the economy rebounds, staff turnover and skills availability are growing problems for rising numbers of companies.
  • Transport problems are becoming more widespread, especially among Manufacturers.

With the economy gradually opening up, fewer companies are experiencing customer demand as a growing challenge for their businesses. At 33% the share of companies in this situation in Q3 2021 is substantially down on the 52% in the final quarter of 2020. In contrast, the number for whom regulatory requirements are causing increasing difficulties has risen over the same period from 33% to 40%. These opposing trends reflect how the economic recovery from the COVID-19 pandemic has clearly been occurring, but has been constrained by the need to relax regulations only slowly.

As business life has started to return to normal, many companies have also faced growing labour market challenges. The current quarter has seen a near-doubling in the number of businesses for whom staff turnover is a rising challenge, and there have been sharp increases in the numbers for whom the availability of either management or non-management skills are becoming more problematic. Each of these has doubled, or nearly so, when compared to the previous quarter.

Another rising area of difficulty is transport problems, with Manufacturers particularly affected. This too is pandemic-related: demand for space on vehicles, ships and aircraft has increased, but many transport staff have had to self isolate as the rates of coronavirus infections have risen sharply. On a more positive note, late payments by customers have diminished as a growing concern, as companies have rebuilt their finances.

Prices

Input costs and prices are rising but do not look out of control.

  • Input prices have picked up, and are expected to rise further over the coming 12 months, at a similar rate to that seen in the years immediately before the pandemic.
  • Companies are experiencing upward pressure on their costs, with increases in raw material and fuel prices, and many face supply shortages.
  • In consequence, prices charged to customers are also rising, although still only modestly, with a 0.6% increase over the past 12 months and a further 1.4% gain projected for the year ahead.

As the economy recovers there is inevitably some upward pressure on costs and prices, especially in cases where demand is returning strongly but where there are supply constraints. This is occurring both domestically and globally, with increases in many fuel and raw material prices. Other ICAEW survey suggests that nearly two thirds (64%) of companies surveyed in June were experiencing shortages in their supplies, with over a quarter (28%) saying that these were severe.

As a result, there has been a pick-up in input prices, which are 1.6% higher in the current quarter than a year ago. Companies expect this to continue, with another 2.0% increase in the 12 months ahead. To put that in context, the average input price rise reported over the three-year period 2017-19 was 2.3%, so slightly higher.

Businesses have been able to partially respond to higher costs with increases in selling prices, which in the current quarter are 0.6% higher than a year ago. Looking forward, they expect future selling prices to match input price rises, with a 1.4% rise over the next 12 months. Again, this is in line with increases seen before the pandemic.

Employment

Wages are also picking up, reflecting recovery in employment.

  • Average total salaries are 0.4% higher in the current quarter than a year ago, and businesses expect a 2.3% increase over the 12 months to Q3 2022.
  • Increasing issues with skills availability and expectations of rising employment over the coming year explain the pick-up in salary costs.
  • The 3.0% projected increase in employment levels comes despite the winding down of the Coronavirus Job Retention Scheme. If it occurs it will be the largest rise since this survey began. 

Increases in input prices are being paralleled by rises in wage costs. Average total salaries are a marginal 0.4% higher in the current quarter than a year ago, but businesses expect a rather stronger 2.3% increase over the 12 months to Q3 2022. If achieved, this will be similar to the increases seen from late 2014 through to the final quarter of 2019, before the pandemic struck.

Higher wage costs are consistent with evidence of increasing problems with skills availability and a bottoming-out in employment, plus expectations of rising workforce numbers to come. That comes despite the fact that the loss of jobs that the pandemic precipitated was actually quite modest, compared with the much larger fall in output. The difference was largely thanks to the government’s Coronavirus Job Retention Scheme and, as a result, job numbers in the current quarter are only 0.2% down on a year ago.

However, that scheme is now being wound down. But with customer demand expected to rise rapidly over the coming year, businesses expect a strong 3.0% rise in payrolls over the next 12 months. If that occurs, it will be the fastest increase on record.

Investment

Spare capacity is sharply down and businesses plan increased investment.

  • Spare capacity has fallen sharply, to 46% in the current quarter ‒ the lowest rate for six years. Meanwhile, profits are only slightly down on a year ago and a sharp rise over the next 12 months is expected.
  • As a result, companies plan a 3.1% rise in capital spending and a 1.7% increase in Research & Development budgets. The former is well above pre-pandemic rates of increase, and companies’ investment plans do tend to understate what they actually spend.
  • Higher investment should, in time, help to expand capacity and hence avert supply shortages and inflationary pressures.

Recent quarters have seen a rapid decline in the proportion of companies operating with spare capacity, down from 63% in Q4 2020 to 46% in the current quarter ‒ the lowest level since Q3 2015. This clearly reflects the pick-up in demand that companies have seen, although it may also be partly the result of businesses deciding to withdraw unused capacity.

With companies now anticipating strong growth in exports and especially in domestic sales, many are now upgrading their investment plans. That is helped by a less challenging financial situation than in recent quarters. Only 10% say that access to capital is a growing constraint on their businesses, while profits in the current quarter are only 1.2% below their level of a year ago. Critically, companies expect to achieve a substantial 7.4% rise in profits over the coming 12 months.

Accordingly, companies anticipate that their spending on capital equipment will rise by 3.1% over the next 12 months, and that their Research & Development budgets will increase by 1.7%. If achieved, the first of those would be the highest increase since Q3 2015. In practice, companies do tend to under-predict the amount of capital spending that they actually undertake, although even a return to normal rates of capital spending would help to expand capacity and so reduce the risk of sustained supply shortages, and consequent upward pressure on prices.

Confidence by sector

Improvements expected across all sectors after mixed experiences over the past 12 months.

  • Sales performance has varied hugely across different sectors over the past year, but all expect strong expansions in demand over the coming 12 months, led by Transport & Storage and Retail & Wholesale. And the Business Confidence Index has improved across most sectors.
  • Employment is also expected to rise in all sectors, with businesses in IT & Communications having the strongest growth projections.
  • And all sectors expect to increase spending on capital investment and Research & Development, led by businesses in Retail & Wholesale, reflecting the need to shift to more online trading. The sector nevertheless has a higher proportion of businesses operating below capacity than nationally.
  • The Transport & Storage sector has the most widespread problems with customer demand, while at the same time, transport problems are most widespread for companies in the Manufacturing sector.

Sales performance has varied hugely across different sectors over the past year. Many still have lower sales in the current quarter than a year ago ‒ a period which was itself well down on pre-pandemic levels ‒ whereas others have increased their sales in the period. At the lower end is Transport & Storage, while IT & Communications, Banking, Finance & Insurance and Business Services have all seen rises in both their domestic sales and their exports.

In contrast all sectors are expecting strong expansions in both domestic and international sales over the coming 12 months, with Transport & Storage companies the most bullish. Retailers also expect a strong recovery, while businesses in IT & Communications expect sales growth to accelerate further.

Consequently, the Business Confidence Index has improved across most sectors.

Employment is also expected to rise in all sectors over the next 12 months. Businesses in IT & Communications have the strongest growth projection here, with the sector looking to build on its performance over the last year, and to capitalise on the boost to demand for digital services caused by the pandemic.

All sectors also expect to increase spending on capital investment and Research & Development, led by businesses in Retail & Wholesale. This also reflects the shift towards digital trading brought about by the pandemic, and the consequent need for companies in the sector to shift online. And in recent quarters Retailers & Wholesalers have consistently reduced spare capacity, partly because demand has returned and shops have reopened, but also because they have closed their retail premises. Nevertheless, the sector still has more spare capacity, on average, than nationally.

The pick-up that is occurring in input price inflation is also affecting all sectors, with further rises expected everywhere in the year ahead. These costs are set to rise fastest in the Manufacturing sector, as producers contend with supply disruptions and mounting capacity constraints. The Construction and Transport & Storage sectors also expect to see faster than average increases. These three sectors are also the ones within which growing concerns over the availability of non-management skills are particularly widespread.

Among other challenges, rising transport problems are by far the most widespread in the Manufacturing sector, while the Transport & Storage sector itself is the one with highest incidence of problems with customer demand. Severe restrictions on international travel have remained in place, and public transport demand is still very subdued.

Confidence by region and nation

Widespread optimism, led by the West Midlands and London.

  • Business confidence is in firmly positive territory across all UK nations and regions, led by the West Midlands and London.
  • On the downside, businesses in Northern England are becoming particularly challenged by skill availability and staff turnover.

The Business Confidence Index has risen to record highs in all but two parts of the UK, with the West Midlands the frontrunner, followed by London, where businesses plan to increase staff levels at their fastest rate in over a decade.

The South East and East Midlands also stand near the top of the confidence spectrum. The pandemic was severely damaging for businesses in the East Midlands, so this is a marked turnaround.

The proportions of businesses citing the availability of non-management skills are highest in Northern England, while staff turnover is most widely cited in both Northern England and the North West. Businesses in the North West and Yorkshire & Humber anticipate the sharpest rises in input price inflation.

Confidence by business size and type

  • The improvement in confidence is very widely spread among businesses, although those that only sell into domestic markets are a little more optimistic than those that export.

The improvement in sentiment is apparent across different types of companies, with only small variations. The Confidence Index is higher for UK listed companies than for Small and Medium Sized Enterprises, and the differences between exporting and non-exporting companies are also small. Companies that only sell domestically should benefit from the particular strength of the UK economy, while transport problems are weighing much more heavily on exporters than on non-exporters.

  1. Sign up to the BCM newsletter
Contributing

If you're an ICAEW member working in industry or commerce you might be called to give an opinion on the economic prospects facing your organisation - please spare a few minutes to take part. Your views will provide information on matters of key concern to a broader businesses community, policy-makers and the media.

Using BCM data

If you'd like to use this data in a publication or share it with clients, please tell us in advance by emailing bcm@icaew.com, and make sure to reference 'ICAEW Business Confidence Monitor' in full whenever you are citing the data.